What is a caveat loan and how does it work?

A caveat is not a mortgage. It gives the lender no power of sale on its own; it gives them the ability to block a sale or refinance until they are paid. Most caveat loan agreements also include a charging clause and an equitable mortgage, so if the borrower defaults the lender can apply to court to enforce. In practice the caveat itself does the work: nobody can settle a sale or a refinance of the property until the caveat is withdrawn, and the lender withdraws it when repaid.

The lender looks at the property value, usually from a desktop valuation or recent sales evidence, deducts the existing mortgage, and lends a percentage of what is left. Total debt including the first mortgage typically cannot exceed 65 to 75 per cent of value. On a $1,200,000 property with a $600,000 mortgage, a caveat lender might advance $200,000 to $250,000. Interest is quoted per month, usually between 1 and 3 per cent, and is often capitalised or prepaid from the advance, so the borrower receives the loan less interest and fees.

Caveat loans are interest only with the principal due at the end of the term, so the lender wants to know exactly how they will be repaid: a property sale with a contract in place, a refinance to a bank once the reason for the loan has passed, the settlement of another deal, or a business receivable. A loan with no credible exit is a loan that ends in default fees and enforcement. Specialists spend more time on the exit than on the loan.

Business owners bridging a cash flow gap, developers covering a shortfall to settle land, buyers whose finance fell over the week before settlement, investors needing to move before a bank loan can be arranged, and people paying out an urgent debt such as the ATO before it becomes a default. Almost all caveat lending is for business or investment purposes, because consumer-purpose lending brings in the National Credit Code and most private lenders will not do it.